OTTAWA - The Bank of Canada is presenting a mostly rosy picture of the economy over the next three years, saying Canadians will continue to have robust job prospects and higher disposable incomes.
The projections in the bank's semi-annual Monetary Policy Report released Thursday continue to highlight the increased risk of inflation and the unexpected stubbornness of the U.S. economic weakness.
And for the first time, the bank has begun to factor in the impact of the aging population as baby boomers approach retirement.
The leading edge of the baby boomers, the generation born after 1946, will reach 62 in the next two years and the bank projects the reduced labour supply will result in a 0.1 per cent decline in potential gross domestic growth in 2009.
Going forward, the effect will increase, said the bank -- meaning that unless productivity increases, Canadians will have to get used to lower growth.
But overall, the bank says the Canadian economy is picking up steam from last year's poor fourth quarter, and cash-flush Canadians will continue to spend like it's Christmas and drive the economy forward.
"Consumer spending is expected to grow solidly over the projection period, reflecting further gains in real disposable income and increases in household net worth,'' the report states.
Canada's superior economic prospects over the United States, combined with continuing strong commodity prices, will keep the loonie trading in a relatively high range between 86.5 and 89.5 cents US, the forecast says.
The bank's projection of gross domestic product is that it will grow by 2.2 per cent this year and 2.7 per cent in each of the next two years.
As it did on Tuesday when it left its key interest rate unchanged at 4.25 per cent, the bank stressed the risk of inflation.
Headline inflation, which includes volatile gasoline and food prices, will hit a relatively high 2.8 per cent by the end of the year, the bank says. But that will largely reflect year-over-year comparisons with slack gasoline prices last October.
Core inflation, excluding fuel and food, was running at 2.3 per cent in March but is expected to moderate, suggesting that the bank does not view price risks as sufficient to warrant the first interest-rate increase since last May.
Excess demand combined with the momentum of higher food prices will keep inflation above the bank's desired target for most of this year, before returning to the two per cent target level next year and in 2009.
That's because the upward pressure on prices from an economy operating slightly above its output potential will ease and the red-hot housing market, particularly in the West, will begin to cool.
"This inflation projection is consistent with an unchanged target for the overnight interest rate,'' the bank said.
The main blemish on the rosy picture is the unexpectedly stubborn weakness in the U.S. economy, which is dragging down Canadian exports to the American market.
The bank expects U.S. growth will slow to 2.1 per cent this year, from 3.3 per cent last year, largely based on the meltdown of the American housing sector which is expected to continue through 2007, and weaker business investment.
The impact on Canada in terms of less demand south of the border will be felt most acutely in the first half of this year before easing as U.S. growth begins a slow climb back to 2006 levels, the Bank of Canada predicts.
The U.S. effect is being offset by a world economy that although slowing from last year's torrid pace, will expand by 4.8 per cent this year and 4.6 per cent next.
Prospects for Canadian businesses remain high, the bank said, predicting continuing solid profits and robust investment.
